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Wednesday, February 08, 2012

Up in the air: Can the EU’s tax on airline emissions ever work in its current form?

You can’t say Brussels wasn’t warned. After protests and criticism from various non-member states and international organisations, the European Union’s decision to impose a carbon tax on flights in and out of the EU has fallen flat, as China announced it would ignore it and the US Congress prepares to ramp up action against it. It seems quite a feat, even for the EU, to get China and the US on the same side of a trade dispute.

The new legislation, which came into effect this year, forces all airlines flying in or out of Europe to buy carbon permits (from the EU’s Emission’s Trading Scheme) to cover their emissions. This is intended to help Brussels meet its 2020 commitment to reduce greenhouse gas emissions by 20% from 1990 levels. Until now, the aviation industry’s environmental impact had not been regulated – and in that sense the EU’s proposal may be positive as a first salvo. The move has been welcomed by environmentalists, who point out that airlines’ share of world emissions (currently 3%) is set to soar in the coming years.

Interestingly enough, governments are far more vocal about the drawbacks of the trading scheme than its impact on the airlines specifically. This is because airlines could actually stand to gain under the new scheme, according to a report in The Economist. Under the plan airlines will only be charged for 15% of the carbon that they emit – or possibly less if their government has an offsetting scheme. The scheme will give airlines a valid excuse to raise prices to compensate for the higher operating costs – although the chances of them using the opportunity to squeeze out more profits cannot be ruled out. By increasing ticket prices by just 25 eurocents, Ryanair stands to gain more than €10 million from the new scheme. The lax carbon quota also means that the scheme is unlikely to achieve its environmental aims, although this is true of much of the EU ETS. In sum, there is a good chance that consumer behaviour won’t be affected by the small price rise, and that airlines will increase the number of flights as their profits rise. This would further undermine the weak environmental credentials of the policy.

It’s likely that non-EU member states are kicking up a fuss because the new scheme implies a loss of sovereignty. China’s foreign Ministry accused the EU of applying “unilateral” measures to the global airline industry. Under the new scheme, airlines (all of which are state-owned in mainland China) pay for 15% of the carbon burnt across entire trips, rather than just that used flying over Europe. Airlines would therefore essentially be taxed outside of the EU’s jurisdiction. In addition, there is less scope for non-EU governments to impose their own tax to off-set carbon emissions – a big issue given the questionable format of the EU tax.

Beijing and Washington are also wary of Brussels’ wider meddling in global environmental standards. The EU’s mooted Fuel Quality Directive is set to impose regulation which would reduce the lifecycle intensity of greenhouse gasses emitted by the transport industry. Such a move would jeopardise US and Chinese interests in high carbon fuel, which has a ruthlessly efficient lobby industry. It’s likely that China and the US are partly arguing against the current measures, as they hope to thwart further EU plans and avoid setting a precedence of adhering to EU environmental standards.

Regulating the airline industry has valid environmental aims but in this case the EU’s proposal looks to not only fall short of these goals but also of foreign policy and consumer protection consideration. This comes as no surprise given the EU’s track record on the environment, as Open Europe has shown. It’s a reasonable opening gambit, but the EU should now focus on negotiating with China and the US to find a global consensus on how best to approach the issue.